Section 140 and 140A – cousins or siblings?

Section 140 and Section 140A of the Income Tax Act 1967 are common provisions used by the Inland Revenue Board (“IRB”) in investigating transactions between related/unrelated persons and in finding whether the arrangement is a tax avoidance scheme. Section 140 empowers the Director General of Inland Revenue (“DGIR”) to disregard or vary a transaction and make such adjustments where the DGIR is of the view that the transaction was a means of tax avoidance. Section 140A on the other hand allows the DGIR to substitute the price where he is of the view that a transaction is not reflective of the arm’s length principle.

At first glance, it appears that Section 140 is wider than Section 140A in that the DGIR is empowered to disregard or vary a transaction whereas Section 140A only allows the DGIR to vary the price. However, there is case law that held that the two sections are to a certain extent mutually exclusive of each other.

With the amendment of Section 140A introduced in the Finance Act 2020, the question is whether the lines between the two sections are blurred.

(I) Section 140

For ease of reference, Section 140(1) reads as follows:

“(1) The Director General, where he has reason to believe that any transaction has the direct or indirect effect of—

(a) altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person;

(b) relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return;

(c) evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by this Act; or

(d) hindering or preventing the operation of this Act in any respect,

may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he thinks fit with a view to counteracting the whole or any part of any such direct or indirect effect of the transaction.

In simple words, where the DGIR is satisfied that a certain transaction was entered for tax avoidance, the DGIR is allowed to make any adjustment to the transaction which would be (ideally) reflective of a genuine and legitimate transaction.

In the case of Syarikat Ibraco-Peremba Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the Court of Appeal upheld the findings by the IRB that a certain arrangement entered into by the taxpayer served no purpose other than tax avoidance. In this case, the taxpayer, a property development company, had identified certain lots of land (the lands) as being suitable for long-term investment. The plan was to build shophouses and a complex on the lands and then lease the developed units for a period of time before selling the same in its entirety or units. The taxpayer approached its tax consultants which gave the following advice:

we have considered a structure which, if implemented, could result in the sales proceeds being treated as capital gains and hence, be subject to RPGT. That is, the lands will be transferred to a 100% realty company of Ibraco. Real property gains tax is payable on the market surplus of the lands. Stamp duty exemption should be available under Section 15A of the Stamp Act. As the developed properties will be held for rental for a relatively long period, say 5 years, there is a valid argument that the gain (or loss) of the investment properties is on capital account and subject to real property gains tax.”

In reliance on the above advice, the taxpayer did the following:

  • the taxpayer formed a subsidiary that transacted with the taxpayer to develop the project;
  • the principal activity of the subsidiary was investment holding and property development;
  • After the sale of the land from the taxpayer to the subsidiary, parties entered into a turnkey contract to develop the project;
  • Upon completion of the project, the taxpayer undertook a corporate restructuring exercise whereby the taxpayer’s shares in the subsidiary was sold to a related company; and
  • The subsidiary and the related company were all wound up.


The Court of Appeal rules that the above transaction was invalid. In reliance of cases such as W T Ramsay Ltd v Inland Revenue Commissioners [1981] 1 All E.R.865, [1982] AC 300 H.L., the Court of Appeal found that there was tax avoidance when the transactions entered into by the taxpayer through shell companies revealed the factual situation that the tax position was altered and that the taxpayer had implemented a scheme following the advice of the tax consultant in perpetuating one original intention of selling of the properties as it intended to do from the start.

However, in the case of Ensco Gerudi (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported), the arrangement entered via a Labuan company was held to be valid. Pursuant to the Court of Appeal’s dismissal of the IRB’s appeal, several legislative changes were introduced which introduced substance requirements for Labuan companies (see Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018)

In this case, the taxpayer was in the business of providing offshore drilling services to the petroleum industry in Malaysia. The taxpayer does not own any drilling rigs hence it would enter into a leasing agreement on a bareboat basis with a rig owner within the Ensco group of companies. A Labuan company was set up to facilitate easier business dealing for the taxpayer. It must be noted that Labuan Offshore Financial Services Authority and Bank Negara Malaysia had approved the Labuan company – ENSCO Labuan Limited (“ELL”).

The IRB invoked section 140(1)(c) and disregarded the transaction between the taxpayer and ELL. The IRB alleged that the arrangement between ELL and the taxpayer amounts to tax avoidance as:

  • ELL had no economic or commercial substance;
  • The economic and absolute rights over the assets were not transferred to ELL;
  • ELL is a company under Ensco plc;
  • ELL only does business with the taxpayer to benefit from the tax incentive; and
  • There was a purported increase in rental rate compared to before, providing the impression that the taxpayer is shifting profits through ELL to Ensco Plc.

The High Court ruled in favour of the taxpayer and held the transactions between the taxpayer and ELL were legitimate and did not attract withholding tax. The unilateral imposition of requirements requiring employees in Labuan, maintaining a Labuan bank account, own the assets that will be leased, and that the Labuan company must enter into leasing business with several entities was ultra vires. In particular, the High Court held that “there is nothing artificial about the payments, and there is no circularity of payment”. In echoing the sentiments in the case of Sabah Berjaya Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [1999] 3 CLJ 587, taxpayers have the freedom to structure transactions to minimise their incidence of tax. Section 140(1) does not apply where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.

The Court of Appeal dismissed the IRB’s appeal.

It should be noted that the Income Tax Act 1967 also places legal restrictions on the IRB to adhere to principles of natural justice. In the case of Port Dickson Power Bhd v Ketua Pengarah Hasil Dalam Negeri, the High Court found that the absence of specification of which subsection of Section 140 to be relied upon and particulars of the notice of additional assessments since Section 140 does require the DGIR to have “reasons to believe”.

(II) Section 140A

Section 140A is often related as a transfer pricing provision whereby the section mandates that transactions between related persons must be conducted at arm’s length. Ideally, the transfer price should not differ from the prevailing market price which would be reflected in a transaction between independent persons.

Section 140A(3) provides as follow:

(3) Where the Director General has reason to believe that any property or services referred to in subsection (2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm’s length, he may in determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm’s length price for the transaction.

In the case of SPSASB v KPHDN, the taxpayer’s principal activity is to provide shared central function services to companies within the group of companies. The taxpayer is part of a contractual arrangement for the sharing of services and resources within the scope of a Cost Contribution (“CCA”) within the group of companies.

Pursuant to a tax audit, the IRB imposed a mark-up on the costs recovered by the taxpayer from its related companies for services provided under the CCA. The Respondent’s basis for such is consequent to the position that the arrangement between SPSASB and its related companies is not a CCA but instead an intra-group services arrangement.


Aggrieved, the taxpayer applied for judicial review. Amongst others, the taxpayer alleged that Section 140A does not allow the Respondent to recharacterise the CCA into an intra-group services group arrangement. Based on the Supreme Court’s decision in the Hup Cheong Timber case, where if the DGIR was of the view that a transaction/arrangement had been entered into to avoid taxes, the DGIR should invoke Section 140(1) to make the adjustment, and, in doing so, must provide particulars of the adjustment made. There was failure by the IRB to observe the importance of applying OECD standards as in the case of Damco Logistics Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2011] MSTC 30 – 033.

The High Court dismissed the taxpayer’s judicial review application but the Court of Appeal reversed this ruling.

Amendment to Section 140A in Finance Act 2020

The Finance Act 2020 amended Section 140A with, amongst others, the insertion of (3a) or (3b):

(3a) The Director General may disregard any structure adopted by a person in entering into a transaction if—

(a) the economic substance of that transaction differs from its form; or

(b) the form and substance of that transaction are the same but the arrangement made in relation to the transaction, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the Director General from determining an appropriate transfer price.

(3b) Where the Director General disregards any structure adopted by a person entering into a transaction under subsection (3a), the Director General shall make adjustments to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regard to the economic and commercial reality.

Essentially, the above amendments allowed the DGIR to disregard any structure and make adjustments such that it would be reflective of independent persons dealing at arm’s length. This would most likely include the power to recharacterise the nature of an agreement into another.

Vide the amendment, the differences between Section 140 and 140A are now blurred. Previously, the DGIR was only empowered to substitute the price of a transaction not deemed to be at arm’s length. However, the amendment now accords with the DGIR with wider powers to carry out other means of adjustment than mere substitution. Whether or not the ability to “disregard any structure” under Section 140A is synonymous with the DGIR’s powers to disregard or vary transactions that had the effect of altering the incidence of tax, relieving from tax liability, evading or avoiding tax, or hindering or preventing the operation of the Income Tax Act under Section 140 is an issue to be deliberated through future case laws.